Individual Income Tax Insights: Federal Legislation to Provide Nonresident Employees and Employers a Pass from State Income Taxes

The Mobile Workforce State Income Tax Simplification Act of 2015 is a bipartisan bill currently pending before Congress, aimed at providing a 30-day exempt period from a state’s income tax for nonresident employees temporarily conducting business in a state. This grace period would also apply to an employer’s withholding requirements. In other words, traveling, nonresident employees would have no personal income tax liability in a state in which business is conducted for less than 30 days per year and their employers would have no withholding obligation.

This proposed act, however, would not apply to athletes, entertainers and the like. These individuals who are paid substantially on the basis of specific events will continue to have individual income tax liability in the nonresident state.

This proposed act has companion bills pending in both the House of Representatives and Senate. House bill H.R. 2315 was introduced on May 14, 2015, by Representative Mike Bishop (R-MI) and Representative Hank Johnson (D-GA). Senate bill S. 386 was introduced on Feb. 5, 2015, by Senator John Thune (R-SD) and Senator Sherrod Brown (D-OH).

“This important bipartisan legislation simplifies the tax code and would help Americans who work across multiple jurisdictions from being taxed by state and local governments other than the places in which they live or perform duties over an extended period,“ said Rep. Johnson.  Thus, an employee would only have state income tax liability in states in which work is done for more than 30 days each year, and would remain fully liable for the state individual income tax where the employee resides. 

Although states have specific thresholds in place for the amount of time a nonresident employee must work in the state before being taxed, there is no uniformity across the states. Some states, like Colorado, will tax any income earned within the state if an individual has worked there at least one day. Others, like Hawaii and Arizona, have much more generous requirements, only requiring withholding for work that exceeds 60 days. Other states do not use a time requirement at all; rather, taxation is based on a specific dollar figure earned while in the state.

The Mobile Workforce State Income Tax Simplification Act of 2015 is intended to lessen the burden of reporting requirements on employers and minimize confusion for taxpayers, all while increasing tax compliance.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Do states stand to lose a significant amount of revenue if the Mobile Workforce State Income Tax Simplification Act of 2015 is enacted?

For more information regarding withholding see the Individual income Tax Navigator.

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